GLOBAL OUTLOOK ECONOMY & FINANCIAL MARKETS
Monthly Corporate Review June 2015
Asia: Improving the broader framework
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Contents Executive Summary ……………………………………………………………………………………………………………3 The World at a Glance ………………………………………………………………………………………………………4 Market Outlook. Summary Table of Expected Performance
……………………………………5
Asset Allocation Proposal …………………………………………………………………………………………………6 Country Pages USA: The FED prepares for lift-off, but is still flexible ………………………………………………7 Euro zone: A better negotiating tone with Greece ……………………………………………………8 Asia: The region is holding up better than the rest of EM ………………………………………9 China: Moving up the Value Chain ……………………………………………………………………………10 India: Interesting dynamics in the relationship with China ……………………………………11 Japan: The BoJ’s fears regarding the effects of QQE ……………………………………………………12 Brazil: Close to introducing a growth-oriented narrative? ………………………………………13 Mexico: Slowdown in 1Q GDP but encouraging signs emerge……………………………….…14 Other Markets: EMEA & LatAm …………………………………………………………………………………15 Equity Markets Short Term Assessment ……………………………………………………………………………………………17 Fundamental Assessment …………………………………………………………………………………………17 Fixed Income Markets Fixed Income, Core Countries …………………………………………………………………………………18 Fixed Income, European Peripherals ………………………………………………………………………18 Fixed Income, Emerging Markets ……………………………………………………………………………19 Fixed Income, Corporate bonds ………………………………………………………………………………19 Commodities ……………………………………………………………………………………….……………………………20 Forex ……………………………………………………………………………………………………………………………………22
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Executive Summary -
Economic & Financial Market Outlook
USA - Our view on the Fed is for a rate hike to occur in 3rdQ for three primary reasons: (1) Growth should accelerate as certain negative effects fade (capex spending, strikes in West ports…). (2) The Fed wants to have a tool to use in the event that growth starts to slow down. (3) They would like to start a tightening cycle before the election year in 2016. Eurozone – Industrial & consumer surveys point to the continuation of the cyclical recovery, with GDP forecasts on an upward trend, though the best news could be already behind. ECB - Losses in the fixed income universe have in fact increased the eligible bonds to be bought. The ECB has reiterated its commitment to undertake the programme until September 2016 or beyond. EM Asia – Most economies in Emerging Asia are likely to record decent growth over the next couple of years. These countries have no big external imbalances, are well-placed to benefit from strong US growth, are big winners from lower oil prices, and an anchored inflation means monetary policy is set to remain supportive. See our GDP projections for each country inside. China – The economy is moving up the value chain. The break between China’s exports and imports from EM Asia suggests that China is importing fewer complex components because it is making them itself. India – We are seeing friendly noises being made between India and China about advancing a “strategic cooperative partnership”. Beijing has invited Delhi to join the “One belt One Road initiative” and India has agreed to be a founding member of the AIIB bank. India has also given the green-light to the construction of a new highway linking the two economies. Japan - At the 30-Apr policy board meeting, BoJ board member T. Kuichi suggested that the pace of JGB purchases should be slowed down, due to concerns over the lack of bond market liquidity. LatAm – Brazil: Levy garnered additional support for his fiscal agenda (Congress approved the first set of fiscal measures, although some points were defeated). This gives greater capability to start introducing a more growth-oriented narrative. Social & Political unrest is now much calmer. Mexico - The slowdown in growth during the 1Q15 was due almost entirely to weakness in industry. The decline in manufacturing is related to the soft patch in the US economy. We see encouraging news coming from the service sector, the own mining sector, and from the US, where we expect a recovery of momentum during 2H2015. Equity Markets - Keep exposure to OW Neutral in the global Equity markets in general. Our Andbank system of flow and positioning indicators suggests a lack of significant stress in the equity markets. We consider that the market is slightly overbought but a sudden deep and sustained riskoff shift is unlikely. If a correction takes place, it should prove to be short-lived. Preferred: Eurozone, Spain, India and Mexico. Fixed Income Markets - Hold the 10Y US Treasury (Neutral). Accumulate with yields above 2.25%. Hold your German Bunds (Neutral) until yields come back to 0.4%. Then wait before buying bunds until 1% in yield. Corp credit (EUR): HOLD. HY (EUR): BUY. Corp credit (USD): HOLD. HY USD: HOLD. Peripheral Bonds: BUY. Stay long duration until yields are well below 1%. EM Gov bonds: Still offer value. In hard currency we prefer Brazil, Mexico and Turkey. In local currency, Indonesia, India, Brazil and Turkey. Commodities - SELL. Heavy investment form 2008, full capacity and growth in supply lead us to take the view that the prospects for a new bull market in commodities are dim. OIL: No changes for now in our outlook, namely that we are in a Structural bear oil market. USD50 in the WTI could represent the upper band of the fundamental range. Gold is expensive.
3
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
The World at a glance North A me rica
-2.0
Figures correspond to the last official quarterly report. (Annualized growth rate)
– Last quarterly report. GDP rate (%y/y)
2.6%
2.4%
2.6%
0.0
Sou th Ame ri ca
-2.3% 3.5% 3.5% 1.0%
-0.2%
1.9%
2.0
6% 5.8% 3.2%
0.1%
EU28 -0.2%
2.6%
4.1%
1.3% 0.2%
0.7%
2%
3.2%
4.0
2.4%
2.3% 2.4% 2.7%
1.5% -0.2% 3.4% -0.5%
2.6% 1.3%
1.2%
6.0
Asi a 4.4% -0.7 % 7.0% 5.4%
6.1% 7.5% 2.2%
6.9%
8.0
5.8% 5.0%
2.5%
NZ 3.7%
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Market Outlook – Fundamental Expected Performance Performance Performance Current Fundamental Expected Last month YTD 28/05/2015 Target Performance*
Asset Class
Indices
Equity
S&P 500 (USA) MSCI EMU MSCI UK Spain - Ibex 35 Asia Pac x Japan - Fac tset Japan - Nikkei 225 China - Factset Mkt Index India - Factset Mkt Index Mexic o - IPC Brazil - Bovespa
0.7% 1.5% 1.2% 0.0% 3.8% 2.5% 10.6% 1.0% -0.3% -2.4%
3.0% 18.1% 6.9% 10.7% 29.0% 17.8% 58.8% 5.6% 3.9% 7.9%
2,121 220 2,066 11,383 379 20,551 406 543 44,807 53,976
2,138 243 2,012 13,286 353 20,178 375 622 47,503 53,220
0.8% 10.5% -2.6% 16.7% -6.7% -1.8% -7.6% 14.6% 6.0% -1.4%
Fixed Income Core countries
US Treasury 10 year govie German Bund 10 year govie
-0.6% -1.9%
1.1% 0.3%
2.14 0.52
2.25 0.40
1.23% 1.52%
Fixed Income Peripheral
Spain - 10yr Gov bond Italy - 10yr Gov bond Portugal - 10yr Gov bond Ireland - 10yr Gov bond Greece - 10yr Gov bond
-3.1% -2.8% -3.0% -4.1% 3.3%
-1.3% 0.8% 2.4% 0.7% -8.2%
1.85 1.85 2.51 1.21 10.92
0.90 0.90 1.25 0.50 7.50
9.44% 9.48% 12.55% 6.85% 38.28%
1.4% 3.3%
-6.0% 29.2%
9.04 10.33
8.00 14.50
17.35% -22.99%
0.2% 0.1%
1.4% 0.8%
0.83 0.94
0.70 0.80
2.93% 1.51%
India - 10yr Gov bond Indonesia - 10yr Gov bond (Local & hard crncy) China - 10yr Gov bond Philippines - 10yr Gov bond Thailand - 10yr Gov bond Malaysia - 10yr Gov bond
0.3% -2.3% -0.6% -1.4% -1.6% -0.1%
2.8% 1.3% 2.4% -2.3% 1.5% 3.5%
7.90 8.17 3.54 4.34 2.79 3.90
7.25 7.00 2.50 4.00 2.50 3.50
13.09% 17.49% 11.85% 7.09% 5.14% 7.13%
Fixed Income Latam
Mexic o Mexic o Brazil Brazil -
-0.5% -0.5% 4.1% 2.2%
1.1% 0.7% 5.6% 0.3%
5.98 3.42 12.24 4.38
5.75 3.00 12.00 4.00
7.85% 6.78% 14.15% 7.42%
Commodities
Oil (WTI) Gold
-1.5% -1.3%
7.9% -0.8%
57.69 1,189
40.00 900
-30.66% -24.33%
Fx
EUR/USD JPY/USD JPY/EUR CNY/USD MXN/USD BRL/USD GBP/USD GBP/EUR ASEAN Currenc y Basket (Index)
-2.1% -3.8% -4.1% 0.0% -1.3% -8.4% -1.1% 1.0% -1.6%
-9.8% -2.6% 7.9% 0.0% -4.3% -19.6% -2.0% 8.0% -2.5%
1.09 123.66 134.94 6.20 15.37 3.18 0.65 0.71 97.48
1.00 130.00 130.00 5.90 15.00 3.00 0.68 0.68 105.00
-8.41% -5.13% 3.66% 4.86% 2.41% 5.63% -3.98% 4.77% 7.71%
Fixed Income Turkey - 10yr Gov bond EM Europe (Loc) Russia - 10yr Gov bond Fixed Income IG & HY (Swap spread)
Investment Grade USD Investment Grade EUR
Fixed Income Asia
- 10yr Govie (Loc ) - 10yr Govie (usd) 10yr Govie (Loc) 10yr Govie (usd)
* For Fixed Inc ome instruments, the expected performance refers to a 12 month period
New Targets
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Monthly Global Asset Allocation Proposal Global Asset Allocation Proposal - Global Investor Perspective 1.08
0.90
Conservative
Moderate
Balanced
Growth
< 5%
5%/15%
15%/30%
30%>
Max Drawdown
Strategic Tactical (%) (%)
Asset Class
0.96
Strategic (%)
Tactical (%)
Strategic (%)
Tactical (%)
Strategic Tactical (%) (%)
Money Market
15.0
16.2
10.0
10.0
5.0
4.8
5.0
4.5
Fixed Income Short-Term
25.0
14.9
15.0
8.3
5.0
2.6
0.0
0.0
Fixed Income (L.T) OECD
30.0
32.4
20.0
20.0
15.0
14.3
5.0
4.5
US Gov & Municipals & Agencies
8.1
5.0
3.6
1.1
EU Gov & Municipals & Agencies
8.1
5.0
3.6
1.1
European Peripheral Risk Credit (OCDE)
21.6
10.0 20.0
20.0
7.2 15.0
14.3
2.2 5.0
4.5
Investment Grade USD
5.4
5.0
3.6
1.1
High Yield USD
5.4
5.0
3.6
1.1
Investment Grade EUR
2.2
2.0
1.4
0.4
High Yield EUR
8.6
8.0
5.7
1.8
Fixed Income Eerging Markets
5.0
8.1
7.5
11.3
10.0
14.3
15.0
20.2
Latam Sovereign
2.0
2.8
3.6
5.1
Latam Credit
2.0
2.8
3.6
5.1
Asia Sovereign
2.4
3.4
4.3
6.1
Asia Credit
1.6
2.3
2.9
4.0
Equity OECD
5.0
6.8
20.0
25.0
32.5
38.8
50.0
56.2
US Equity
1.7
6.3
9.7
14.0
European Equity
5.1
18.8
29.1
42.1
Equity Emerging
0.0
0.0
5.0
5.0
10.0
9.6
10.0
9.0
Asian Equity
0.0
2.5
4.8
4.5
Latam Equity
0.0
2.5
4.8
4.5
Commodities
REITS
16.2 20.0
0.0
0.0
2.5
0.6
5.0
1.2
5.0
1.1
Energy
0.0
0.25
0.5
0.45
Minerals & Metals
0.0
0.25
0.5
0.45
Precious
0.0
0.13
0.2
0.22
Agriculture
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2.5
0.0
5.0
0.0
This table of recommended asset allocation has been prepared by the Asset Allocation Committee, comprised of the directors of the portfolio management departments in each of the jurisdictions in which we operate. The recommended weights in each asset class are aligned with the conclusions of the Andbank Investment Committee (AIC) that are reflected throughout this document. Likewise, the distribution of assets within each of the customerâ&#x20AC;&#x2122;s profiles meets the risk control requirements established by the regulation.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
USA: 150
FED prepares for lift-off, but is still flexible
US ACTIVITY FORECAST - NEW ORDERS
150
140
140
130
130
120
120
110
110
100
100
90
90
80
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
80
(INDEX) New Orders, Naics, Manufacturing, Total, Sa, Mil Usd - United States Andbank, US Census Bureau
10
©FactSet Research Systems
US - INFLATION & FED RATES
10
8
8
6
6
4
4
2
2
0
0
-2
-2
-4 -4 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 (% 1YR) CPI All Items US Federal Funds Target Rate - Yield Andbank, US dept. of Labor
8
©FactSet Research Systems
US - INFLATION (CPI ex Shelter)
8
Economy & Policy GDP: The U.S. economy is likely growing somewhat faster than suggested by GDP numbers after the Winter doldrums. Fed rates: Given the tight conditions in labor, it should still provide the inflation triggers necessary to justify a Fed hike by September. Fed uncertainty: Considering the weak reading on nominal GDP in Q1 2015 (+3.9% YoY) and using history as a guide, there has never been a time (since 1955) in which the Fed has started a tightening cycle when nominal GDP growth was below 4.9% YoY. Our view on the Fed is for a rate hike to occur in 3rdQ for three primary reasons: (1) Growth should accelerate as certain negative factors fade (capex spending, strikes in Western ports…). (2) The Fed wants to have a tool to use in the event that growth starts to decelerate. (3) They would like to start a tightening cycle before the election year in 2016. Why the recent rise in bond yields? 40% of the rise was driven by a rise in inflation expectations (by the rise in oil prices, wage growth…), and 60% was due to a rise in real yield (not a rise in inflation expectations). Forecasts • Fed rates: First hike in Sept. 15 • GDP forecast 2.5% (down from 2.8%). • CPI y/y at 1%. • Unemployment forecast: 5.3%. • 10Yr Treasury: 2.25% (from 2.00%). • Equities (S&P): 2.138. Valuations are not undermined unless 10yT yields rise above 2.8%. With 90% of companies having reported, 50% are missing revenue estimates and offering muted guidance; nevertheless consensus is for 4.7% growth in 2015 EPS, and 12.3% growth in 2016 EPS (high in our view). Valuations are at 17.9 PE LTM (stretched but falling short of extremes). • Sectors: Tech, Banks, Cyclicals & Small caps • Credit: Banks have reduced their bond inventories. Default rates in IG at 1.7% (below the 3.8% historical average). By sectors: IG buy Materials, Media, Insurance. In HY buy Retail too.
6
6
4
4
2
2
0
0
-2
-2
-4
-4 Equity: “HOLD”
Recommendations for Financial Markets '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
(% 1YR) CPI-U All Items Less Shelte r U.s Andbank, US Dept. of Labor
©FactSet Research Systems
Gov. Fixed Income: ”HOLD” Inv. Grade Credit: “HOLD” HY: “HOLD”
7
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Euro zone:
A better negotiating tone with Greece
COMPRAS semanales del BCE
ECB purchases
Million EUR
Bonos comprados/semana (en mill. de euros)
18.000 16.000
14bn 14bn
14.000 12.000
10bn
10.000 8.000 6.000 4.000 2.000 0 20-mar
27-mar
3-abr
10-abr
17-abr
24-abr
1-may
8-may
15-may
Fuente: Bloomberg, elaboración propia
CENTRAL BANK’S BALANCE SHEETS
BoJ 91%
(as a % of GDP)
ECB 30%
FED 20%
Policy ECB: Two months have passed and the ECB’s QE show a strict accomplishment of the target for volume and long maturities in the peripheral purchases. Scarcity problems will arise as we advance into 2015. Losses in the fixed income universe have in fact increased the eligible bonds to be bought. The ECB has reiterated its commitment to undertake the programme until September 2016 or beyond, till price expectations are firmly stabilized, and considers that there are no grounds for raising its inflation goal. Prospects for any ECB tightening are still remote. Greece: Some signs of improvement stemming from a better negotiating tone (indeed, the Euro area had a third option: wait and look on as Tsipras takes a desperate decision and the collapse unfolds domestically). Tsipras: “there will be a quick compromise that allows us access to markets again” Juncker proposal: According to sources, the parties involved are working on a proposal focusing on: (1) A minimum primary surplus of 0.75%, (2) Postponement of the VAT increase until the summer, and (3) Postponement of pension reform until the autumn. In return: Greece would receive 1.9bn from ECB profits in Greek debt and another 1.8bn in cheap loans. Timing: The end of June (summer maturities) remains the final deadline. Economics Macro surprises within Europe have decreased slightly during the last month. Retail sales are down. Degree of recovery in industrial output (Italy). Outlook: Industrial & consumer surveys point to a continuation of the cyclical recovery, with GDP forecasts on an upward trend, though the best news may already be behind us (Spain, Germany). All in all this will amount to a 0.4% q/q GDP in EMU. Inflation: Expectations have clearly picked up worldwide (driven by the oil recovery). HCPI remains at 0% yoy in the Eurozone. Financial Markets’ recommendations Equity (MSCI EMU): “BUY” Core Gov Fixed Income: “HOLD” (Tactically) Peripheral bonds “BUY” Inv. Grade Credit:“HOLD” 8 HY: “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Emerging Asia:
Asia is holding up better than the rest of EM
Thomson Datastream, Capital Economics
Asian Assets & the Fed
Policy & Economics Although the performance has been disappointing, exports from Asia are at least holding up better than from other EM regions, which have been hit hard by the slump in commodity prices. Decent Growth expected: Most economies in Emerging Asia are likely to record decent growth over the next couple of years. With China set to ease further in 2015-16, regional growth is likely to remain broadly flat at around 6%. Central Bank policies to remain supportive: Inflation is set to remain very low in the shortterm, but is likely to rebound by the end of the year as the base effect from lower oil prices fades. As such, the region is probably nearing the end of its recent rate-cutting cycle, but rates will remain low. The first rate hikes won’t be seen until late 2016. But it won’t be until 2016 that the region’s central banks move into tightening mode. The region is well-positioned (1) These countries have no big external imbalances, (2) are well-placed to benefit from strong US growth, and (3) are big winners from the lower oil prices. (4) Well-anchored inflation means that monetary policy is set to remain loose. Asia & the Fed: The historical relationship between interest rates in the US and Asia is much weaker than is commonly assumed, and we don’t expect Fed rate hikes to lead to a rash of interest rate increases in Asia Main Estimates: 2015 GDP: EM Asia 6%, China 7%; India 5.5%, Indonesia 5%, Philippines 6.5%, Thailand 3.5%. (2016 GDP: 6% EM Asia). Financial Markets Asian equities should rise over the medium term on the back of decent growth prospects. Government bonds should outperform, as yields should remain fairly low given the backdrop of low policy rates and healthy fiscal positions. Currencies: With central banks ending rate cuts, this could prove to be a supportive factor for these currencies, and will partially offset the start of rate hikes from the Fed. Outlook for financial markets Equity: “HOLD” Gov. Fixed Income: “BUY” Inv. Grade Credit:“BUY” 9 Fx (Diffusion Index): “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
China:
Moving up the Value Chain
Thomson Datastream Capital Economics
New Urban Jobs (millions) Capital Economics
Key Forecasts
Capital Economics
Reforms & economic policy SAFE: “We will adopt IMF accounting standards as early as in our next BOP data” Margin trading & Short selling: the CSF proposed new restrictions to limit their activity to 4x their net capital, and to stop lending to investors who buy stocks with high PE or losses. Corruption: The government is planning a leadership reshuffle at CNPC, Sinopec and China National Offshore Oil Corp. Labor Reforms: (1) Tax breaks for companies that hire the jobless. (2) Preferential loans to entrepreneurs. (3) Preferential placement for bidding in large projects to the firms that do the most hiring. Moving up the value chain: The break between China’s exports and imports from EM Asia suggests that China is importing fewer complex components because it is making them itself. PBoC: cut its benchmark lending rate by 25bps to 5.1%, and its deposit rate to 2.25% Debt: Public debt at 41% of GDP. National debt at 282% Internationalization IMF said that China still needed to allow “more” Yuan convertibility, though it also said that the Yuan is valued fairly for the first time in over a decade. Inclusion of CNY in SDR basket: If this happens, it will prompt the upgrade that is required in CNY’s denominated assets (like the massive upgrade of JPY’s denominated assets in 1980, when JPY was included in the SDR’s basket). Survey of 72 Central Banks: They plan to move 10% of their Fx Reserves into RMB (which means around US$1trn). The size of the Dim Sum Bond market (US$ 0.11trn) Economy Services: HSBC PMI up to 52.9. Official PMI 53.4 Manufacturing: HSBC PMI has shrunk to 48.9. Official PMI unchanged at 50.1 FDI: Jan-Apr up 11.1% y/y (to $44b) CPI: +1.5% y/y in April (vs 1.4% prior) Equity Markets Accelerated IPO approvals prompted domestic investors to sell – a sign that the Authorities want to deflate the current bull market. Outlook for Financial Markets Equity: “HOLD” Fixed Income: “BUY” Inv. Grade Credit:“BUY” 10 Fx: “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
India: 20
Interesting dynamics in the relationship with China
INDUSTRIAL PRODUCTION - INDIA (%Y/Y, MA3m)
20
16
16
12
12
8
8
4
4
0
0
-4
-4
-8
-8 '10
'11
'12
Total
'13
Manufacturing
Mining & Quarrying
Andba nk, India Ministry of Sta tistics
4
'14 ©FactSe t Research Systems
INDIA - EXTERNAL BALANCE (% OF GDP)
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-8
Trendline: 1 Year Moving Average Andbank, Reserve Bank of India
©FactSet Research Systems
Recent developments China and India have a combined population of 2.6bn (36% of the global total), and they “share a border that is 4,000km long. Yet China does more trade with Thailand and there are 8 times as many flights between Beijing and Bangkok as there are between Beijing and Delhi. The weak ties between Asia’s two giants are a gigantic missed opportunity for global investment.” India remains wary of China’s regional ambitions (some border disputes remain unresolved), and the US has offered India access to advanced military technology to counter the Chinese threat, by signing the ‘Joint Strategic Vision’ in January. China is making friendly noises about advancing a “strategic cooperative partnership” with India: (1) Beijing has invited Delhi to join the “One belt One Road initiative” and India has agreed to be a founding member of the AIIB bank. (2) China has endorsed India’s membership of the Asia-Pacific Economic Cooperation Forum, whilst India has given the green-light to the construction of a new highway linking the two economies. Reforms & Policy A faction that is critical of Modi argues that the reforms promised have vanished. Indeed, Modi is encountering some resistance to his modernization of the public sector, but the fact remains that Modi has taken some remarkable steps: (1) The new government has overcome the political paralysis (achieving certain key alliances). (2) The inefficient state monopolies have been targeted (notably Indian Railways), through the most ambitious reform of the last 100 years aimed at modernizing the network and separating ownership from operational activity, with foreign private companies having the option to operate them. (3) A new mining law which permits the opening up of this activity to private companies. (4) The Passing of the Coal Bill this April established the conditions required in order to privatize a 2nd state-owned firm. (5) Fiscal reforms (a radical breakthrough) with “spending autonomy in exchange for strict caps on deficit”. Economy Inflation well anchored at 5.2% y/y Industrial activity: +5% y/y Outlook for Financial Markets Equity – “BUY” Fixed Income: “BUY” 11 Fx: “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Japan:
The BoJ’s fears regarding the effects of QQE
JAPAN, INFLATION - CPI TOKYO (% y/y)
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
'05
'06
'07
'08
'09
'10
'11
'12
'13
-3
'14
(% 1YR) C PI, Tokyo, 2010=100, Index - Japan Andbank, Ministry of Internal affairs & Communications©FactSet Research Systems
40
JAPAN - INSDUSTRIAL PRODUCTION
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
-30
-30
-40
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
-40
(% 1YR) Industrial Production, Mining And Manufacturing Andbank, Ministry of Economy, Trade and Industry
©FactSet Research Systems
Policy QQE’s limits: At the policy board meeting held on 30th April, BoJ board member T. Kuichi suggested that the pace of JGB purchases should be slowed down due to concerns over the lack of bond market liquidity (the government’s plans to purchase new debt in 2016 will mean that the BoJ will have to buy ¥43T from private investors). In turn, the IMF says the BoJ may have to expand QQE if the price target is threatened. BoJ’s fears & intentions: (1) Some of the BoJ’s members said that CPI could dip below zero. (2) Some also warned that lowering asset buying could hamper the effects of QQE. (3) Kuroda is asking the government to retain profits and increase the legal reserve by 5% (to 25%), to provide a larger capital cushion. Very poor Fiscal targets: Target of 1% primary deficit by 2018. Primary budget balance by 2020. Abe addressed the US Congress urging it to finalize the TPP. The Chinese media was critical of Abe’s speech. The ruling LDP agreed to expand the military budget. Outlook BoJ’s six-monthly forecasts: broadly speaking, the BoJ lowered its growth and inflation forecasts. Risks: the BoJ assesses the risk to the broader economy as balanced, but the risks to prices tend towards the downside. Economics 1Q GDP at 0.6% q/q driven by inventory investment. Nominal private consumption contracted. Retail Sales down: -9.7% y/y Consumer confidence down to 41.5 (from 41.7) CPI National y/y 2.3%. CPI Tokyo y/y 0.7% Personal Income down: -11% y/y Coincident Index m/m -1.5% (vs -1.2%) Manufacturing PMI 49.9 Bank Loans y/y 2.6% M2 y/y 3.6% Industrial Production March: -3.35% (vs 2.6% previously). Bankruptcies down 11% y/y in last fiscal year (WSJ). M&A is increasing (Goldman) due to high cash reserves. At 1.8%, Japan's ratio of M&A to GDP remains low relative to its peers. Outlook for Financial Markets Equity: “HOLD” Fixed Income: “SELL” Fx : “SELL” (vs. USD)
12
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Brazil:
Close to introducing a growth-oriented narrative?
Capital Economics, World Bank
Fx Reserves (% of GDP) (Capital Economics, Thomson Datastream)
Average GDP growth (2004-2013)
Policy & Reforms Levy garnered additional support for his fiscal agenda (Congress approved the first set of fiscal measures although some points were defeated). This gives greater capability to start introducing a more growth-oriented narrative (focused on exports, infrastructure and transformation of the public investment process through the BNDES). Very hawkish CB: Raised Selic rate by 0.50% to 13.25%. Goal was to solidify inflation. The government will deliver, in our view, a 1.2% of GDP primary fiscal surplus in 2015, and 2% in 2016: (1) a % of expenses are linked to fiscal revenues. (2) 82.4% of measures do not depend on Congress. Petrobras released audited results which brought much of the uncertainty to an end Dilma’s concessions are working: Levy and M.Temer have been appointed as official negotiators for the economic topics and political articulation), giving rise to a government of technocrats, a clear signal of Rouseff’s compromise with the fiscal adjustments. A more liberal directive is now in motion: Pushed forward from the top, with good coordination and implementation. Focused on streamlining SOEs (more autonomy, cutting political interference, allowing prices and quality to adjust freely) Public Finance & fruits coming from measures. (1) High nominal GDP helped to cut Debt/GDP in 2014 to 60%. (2) Net debt is just 34.1% of GDP (3) External debt is low (20% of GDP). (4) The structure of the external debt is less of a concern (90% of this debt has a long maturity). (5) They can use their Fx reserves, built up over the past decade ($365bn or 17% of GDP) Rating: S&P kept the Investment Grade at Stable Outlook Social & Political unrest is now much calmer: The protests on April 12 were far smaller in scale than the ones last March Economics CPI fell for first time in April with early signs of hope, with the big increases in regulated prices fading. CPI could be peaking now. GDP growth: 2014 GDP growth was 0.1%, but it was revised up for 2013 (to 2.7%). Financial Markets’ Outlook Equity: “HOLD” Fixed Income (Loc): “BUY” Fixed Income (USD): “BUY” 13 Fx: “HOLD”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Mexico: 6
Slowdown in GDP but … encouraging signs emerge
GDP GROWTH - US vs MEXICO
8 6
4
4 2
2 0
0
-2
-2
-4 -4
-6
-6 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
-8
(% 1YR) MEX - Economic Activity Indicator (as a Proxy for GDP) (Right) (% 1YR) US - GDP (Left) Andbank, INEGI, US Bureau of Economic Analysis
12 11
©FactSet Research Systems
MEXICO - CAPITAL FLOWS (Quarterly, bn$US)
20
10 9 8 7 6
15
5 4 3
0
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'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
-5
(MOV 12M) FDI Mexico ($bn) (Left) (MOV 1Y) Foreign Investment Portfolio, Mexico ($bn) (Right) Andbank,Bank of Mexico
©FactSet Research Systems
MEXICO IPC - NET MARGIN (%)
24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 '05
14 13 12 11 10 9
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8
(MO V 1Y) Mexico IPC - Net Margin (Right) Mex ico IPC - Price to Earnings Ratio (Left) Andbank, Bolsa Mexicana de Valores
©FactSet Research Systems
Economics GDP slowdown: The slowdown in growth during the 1Q15 (0.4% q/q, below the 0.7% recorded in 4Q14), was due almost entirely to weakness in industry (-0.2% q/q). The decline in manufacturing is related to the soft patch in the US economy, and mining also contracted (-0.3% q/q) as oil output was cut back following the drop in prices. Encouraging news came from (1) A service sector that has held up well (+0.5% q/q), (2) the own mining sector, where dynamics are starting to stabilize, and (3) from the US, where we expect a recovery during 2H2015. 1Q is the lower point: With fiscal policy set to tighten over the course of this year, Mexico’s economy will not take off aggressively. Nonetheless, Q1 should be the low point for q/q growth. Central Bank: Banxico isn’t worried about the inflation path. Expectations are still anchored. 2015 estimated inflation lies at around the 3% goal. Core inflation is expected to remain below the target rate. Policy Energy reform: the third phase of Round 1 was announced last week, offering onshore fields that will be assigned through licenses; the results are going to be announced in the last quarter of the year Equity: Results are on the upside (more favourable consumption environment). Sales +7.5% y/y. The trend may be extended, with payrolls growing at 5.8% y/y. Target of 47.500. Preferred sectors: retailers, auto parts, construction, industrial. Fx: The lack of certainty over the Fed is weighing on currencies. We have revised up our target to 15.00 (from 14.75). Bonds: Volatility will continue (but will be lower in the long end of the curve). We expect a flattening of the curve, with the 10-year yield trading in the 5.5%-6.0% range. The “patient” stance adopted and reaffirmed by both the Fed and Banxico leads us to believe that the first rate hike in Mexico could happen in September to end 2015 with an overnight right of 3.5%. Outlook for Financial Markets Equity: “BUY” Fixed Income (Loc): “BUY” Fixed Income (USD): “BUY” 14 Fx: “BUY”
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Others: EMEA & LatAm West – Russia Conflict: Monthly News Flow: (12 negatives, 1 Neutral, 6 positives) Andbank’s Assesment: STILL A NEGATIVE MOOD Russia: (+) Lavrov says “Sochi talks helped Russia and US to understand each other better”. “Both the US and Russia agree that the Ukraine crisis must be resolved using diplomacy” (Breaking News). (+) Lavrov says that the supply of S-300 missiles to Iran will not happen any time soon (Reuters). (+) Gazprom Neft says it has no plans to ask for financial aid from the state fund (Reuters). (+) The oil arm of the giant Gazprom corporation says it will more than double output this year at its Prirazlomnoye Arctic offshore project (Reuters). (-) Lavrov says that the arrival of US troops at a training range in Lviv (Ukraine) indicates that Kiev has breached its commitments (Breaking News). (-) The Russian military has deployed additional air defense systems in eastern Ukraine. (-) The Russian envoy to NATO says that Russia is to boost its military presence in Crimea given NATO’s plans to expand into Eastern Europe (RIA news & Reuters). Ukraine: (-) 26 Ukrainian servicemen have been killed in the past month (as of 21st March). A further 87 have been wounded, making this month even more violent than the previous one. (Reuters) (-) The militias in Eastern Ukrainian accuse the Ukrainian army of using heavy weapons banned under the Minsk deal (Interfax). (-) Kiev says it captured 2 regular Russian soldiers (AFP). The Kremlin reiterates that there are no Russian troops in Eastern Ukraine. Germany: (+) Merkel visits Moscow to discuss Ukraine France: (-) Hollande says he will discuss the sale of helicopter carriers to Russia, which was put on hold, when he meets with Putin, but also noted that “delivery is not possible in the current conditions” USA: (=) US secretary of state John Kerry visits Russia (Sochi) to meet with Putin to discuss Russia’s supply of missiles to Iran, Syria and Ukraine. (This does not come as a surprise as the move is seen as a response following Merkel’s visit to Moscow). (+) Kerry: “If and when the Minsk agreement is fully implemented, it is clear that the US and the EU sanctions can be rolled back”. (Reuters) (-) Kerry warns that the ceasefire in Ukraine was violated at Donetsk Airport (Reuters) (-) Vice president Biden spoke to the Cypriot president Nicos Anastasiades about Ukraine. They agreed on the importance of maintaining transatlantic solidarity” (Breaking News) •
•
UK: (-) The Royal Air Force scrambles typhoon jets to intercept Russian planes conducting military maneuvers near UK air space. NATO: (-) NATO launches military exercises in the North Sea, inviting Sweden to join in, amid tensions with Russia. (Breaking News) (-) NATO’s Secretary General J.Stoltenberg calls on Russia to stop the “deliberate 15 destabilization” of Eastern Ukraine (Reuters)
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Others: EMEA & LatAm Argentina GDP No important news on economic data. Activity remains slow, with some high frequency indicators showing some positive signs (retail sales, construction projects). Fiscal Policy: spending to continue growing at a faster pace than revenues this year, ahead of the elections. Inflation: Secretary of Commerce Augusto Costa said this week that the Government expects inflation to close at around 16% this year (from +23.9% in 2014).. We also expect Congress CPI (index built by opposition law-makers based on private estimates) to show a slowdown in 2015 to +29.0% (from +38.5% in 2014). FX: Official @ 8.95 , Blue 12.65. Target Official year end: 10 pesos per USD. Peso continued to depreciate, but at a slower pace over the last month. The annualized rate of depreciation is 11.7% as of May 15. Some relief came from the BRL appreciation in the last few weeks Reserves Year-end level 26bln (current 34bln). Unchanged in May after big increase in April due to (1) debt issuances on Sovereign and YPF issuances. (2) Also settlements from the PBOC’s currency swap, now estimated at 5.6bln and will continue to grow, impacting the country’s reserves. The likelihood of a currency crisis in 2015 has fallen significantly. Politics: The Governor of the Province of Bs As, Daniel Scioli (the ruling party´s candidate), and the Mayor of the City of Bs As, Mauricio Macri (from the PRO party), are the preferred candidates among voters. Two key questions remain unanswered: 1) Who is Cristina Kirchner going to support in the primaries in Frente Para la Victoria; and (2) Whether or not she - or alternatively her son, Maximo Kirchner - will appear on the presidential ballot, as a candidate for either the Argentine Congress or the Parlasur (the Mercosur Parliament). Debt Markets: Argentine bonds have had a negative month so far in May due to the new Bonar 24 issuance the government made at the end of April (1.5bln). This move by the government, in which it sold bonds to banks with local branches, with no fees paid, no international road show and no English prospectus, was intended to have all the elements necessary to prevent these bonds being blocked by Griesa. The holdout creditors asked for documentation of this retap of the Bonar 24 and are asking Griesa to block payments of these bonds as well, as they should be considered as External Debt too. Recommended Strategy: Caution with bonds at current levels (after a huge outperformance backed by the sentiment that Fx reserves will remain at comfortable levels after the payment of the Boden 15s by Dec 15, and that Liquidity issues are being addressed with the cycle of rollovers from the City of Bs As). SELL Bonar 24 (8.75% coupon 5/7/24 @ YTM of 9.05%). Griesa could block coupons. BUY HY bond of YPFDAR 8.5% 07/28/25 @ 103 YTM 8% HOLD Equity ADRs, favour larger ones such as YPF.
Venezuela Credibility: The Central Bank of Venezuela went through four months in 2015 without providing date on inflation, GDP and some other economic data. Furthermore, under the Law of the Central Bank, numbers should be provided within the first 10 days of each month. Public sector: Spending growing at a faster rate than revenues, in the run-up to the elections. Shortage of cars: The sector received approval from the government to sell new cars in the local currency at the highest official exchange rate (SIMANDI). The sector expects to sell no more than 20% of its capacity in 2015. Fx: Official rates at 6.30 and 196.7 (Black market at 275.68). SICAD2 auctions postponed. The government disburses USD at 6.30 only for some essential products, at 196.7 for other products. Reserves at US$20bn (9.32% lower than on Dec 14 due to lower oil prices). Expectations are that Fx reserves will drop to US$17bn by year-end. Foreign policy: Maduro announced a 50% cut in the oil allocation for PetroCaribe members. This will represent a saving of around US$5bn. 16
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Equity Markets SHORT – TERM ASSESSMENT. RISK-OFF PROBABILITY: LOW
Aggregate Result in our Flow & Sentiment Indicators
Buy signal Positive Bias Neutral Negative Bias Sell signal FINAL VALUATION
Andbank’s System of Flow & Positioning indicators.
Previous
Current
Month
Month
0 3 7 9 3 -2.7
0 3 9 8 2 -2.0
Table of Stress Assessment in Risky Assets
0
-5
-10 Market is Overbought
+5
Area of Neutrality Sell bias
Buy bias
+10 Market is Oversold
Reading: Our Andbank system of flow and positioning indicators shows an aggregate score of –2.0 in a range of -10/+10 (less stressed than last month’s reading of -2.7). Still, the current level suggests a lack of significant stress in the equity markets. We consider that the market is slightly overbought but a sudden deep and sustained risk-off shift is unlikely. If a correction takes place, it should prove to be short-lived. Flows: Japanese stocks continue to receive very remarkable flows whilst Europe is losing momentum (tiny inflows or even outflows of late). EM as a region is recovering flows and it is now flat YTD, thanks in particular to the inflows registered in FI. Positioning: From the GFMS drawn up by Merrill, we can see that due managers have cut the extreme positions in May, although they are still structurally long in assets; it is perceived that they will benefit from higher global growth, higher rates, and a stronger US$ (Europe, Japan, cyclicals, banks, stocks). Managers are of the opinion that bonds, not equities, are most vulnerable to a rise in volatility in 2015. US equity allocation has slumped to a net 19% UW (from net 12% UW last month). Current allocation is the lowest since Jan’08 and is below its long-term average. Investors are increasing their exposure to Eurozone equities on the margin (from net 46% OW to net 49% OW) Current allocation is above its long-term average. Allocation to UK equities is rebounding from net 24% UW to net 12% UW. Current allocation (in line with its long term average). Similar to EZ equities, investors are increasing their exposure to Japanese equities on the margin (from net 38% OW to net 42% OW), above long-term average. FUNDAMENTAL ASSESSMENT: “HOLD” 2014 2015 2014 2015 2015 2014 2015 Sales E[Sales] Net E[Net E[Profit] Index EPS E[EPS] Index % Ch y/y % Ch y/y Margin Margin] % Ch y/y Local* Local* S&P 500 (USA) 2.43% 4.86% 10.03% 10.03% 4.9% 119.45 125.3 MSCI EMU 0.52% 2.50% 4.77% 5.25% 12.8% 10.28 11.6 MSCI UK 1.68% 0.00% 6.57% 5.91% -10.0% 117.65 105.9 Spain - Ibex 35 -8.10% 5.50% 4.39% 6.50% 56.2% 500.33 781.6 Asia Pac x Japan - Factset 7.91% 8.70% 7.60% 7.98% 14.1% 19.34 22.1 Japan - Nikkei 225 10.73% 10.73% 4.87% 4.87% 10.7% 828.30 917.2 China - Factset Mkt Index 8.38% 7.54% 7.95% 8.35% 12.9% 17.47 19.7 India - Factset Mkt Index 3.80% 4.56% 7.05% 7.05% 4.6% 26.52 27.7 Mexico - IPC 5.00% 6.04% 8.79% 9.00% 8.6% 2400.00 2605.8 Brazil - Bovespa 6.96% 8.00% 7.04% 7.74% 18.8% 3733.00 4435.0
2014 2015 INDEX PE ltm E [PE ltm] CURRENT PRICE 17.22 17.07 2,121 18.21 21.00 220 16.54 19.00 2,066 20.60 17.00 11,383 16.68 16.00 379 22.34 22.00 20,551 17.94 19.00 406 20.93 22.42 543 18.59 18.23 44,807 14.84 12.00 53,976
* Except for the fol l owi ng ma rkets : As ia Pa c x Japa n, Chi na and India , where EPS have been reported i n US$.
New Targets
2015 2015 TARGET E[Perform.] PRICE % Ch Y/Y 2138 0.8% 243 10.5% 2012 -2.6% 13286 16.7% 353 -6.7% 20178 -1.8% 375 -7.6% 622 14.6% 47503 6.0% 53220 -1.4%
17
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Fixed Income Markets FIXED INCOME – CORE COUNTRIES UST 10Yr BOND: “HOLD”. New entry point above 2.25% yield. 1. Treasury yields have increased (+28bp) to 2.19%, and Swap rates went up in similar fashion (+33bp) to 2.3%. Swap spread remains at 5bp. For this spread to normalize at 30-40bp, with inflation expectations (swap rate) well anchored in the 2% area, the 10T yield should move to 1.65% 2. The curve has become steeper (now at 161bp vs. 139 previously). With the short end in the 0.5%0.75% range, to reach the LT average spread (120bp), the 10T yield should go to 1.85%). 3. Given the “new normal” (ZIRPs globally), a good entry point in the US 10yT could be when Real Yield is at 0.75% (real yield is currently 2.19%, therefore Treasuries are cheap). EURO BENCHMARK 10Yr BOND: ST view “HOLD”/ LT view “SELL”. Entry point at 1.0% yield. 1. Bund yields have increased (+54bp) to 0.64%, and Swap rates were stable at 1.57%. Swap spread has decreased and remains at 93bp. For this spread to normalize at 30-40bp, with inflation expectations (swap rate) well anchored in the 1.5% area, the 10T yield should go to 1.15% 2. The curve has become steeper (now at 86bp vs. 37 previously). With the short end in the -0.2%0.0% range, to reach the LT average spread (116bp), the 10T yield should move to 1.06%). US D - 10 Y r GOVIE Vs SWAP
7
EUR - 10Yr GOVIE Vs SWAP
4.0
1
1.5
3.5
1.0
6
0,8
5
0,6
2.5
0.5
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1 '05
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'06
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USD 10Y Swap R ate (Le ft) USD 10Y Treas ry Y ield (Le ft)
'11
'12
'13
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- 0.5
1.0 - 1.0 '10
'13
- 1.5
'14
Andbank, Tullet Prebon
©FactSet Research Sys tems
USD YIELD CURVE SLOPE 10/2 Yr (bps)
'12
EUR 10 Y Swa p R a te (Le ft) Swa p Spre a d 10Y EU R EUR 10 Y Go v bo nd Y ie ld ( Le ft)
Swap Sp re ad 10 Y USD (Rig ht)
Andbank, Tullet Prebon
'11
(Right)
©FactSet Res earch Sys tem s
EUR YIELD CURVE SLO PE 10/2 Yr (bps)
350
300
300
300
250
250
250
250
200
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150
150
150
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100
100
100
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10Y Y ield - 2Y Y ield Trend line : Average
(10Y Y ie ld - 2Y Y ie ld) T re ndlin e : A ve ra ge Andbank,Tullet Prebon
300
Andbank, Tullet Prebon
©FactSet Res earch Sys tems
©FactSet Research Systems
FIXED INCOME – EUROPEAN PERIPHERALS: “BUY” 16
10 Yr Govies - European Peripherals
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
7/13
10/13
1/14
4/14
Ita ly Spain Andbank, JPM Chase
7/14 Portugal Ire land
10/14
1/15
4/15
Gre ece ©FactSet Research Systems
•
•
We see the recent jumps in yields as a buy opportunity, since we continue to bank on further declines in yields (at the mercy of Draghi’s QE). We expect the 10Yr yield to fall below 1% in the Spanish and Italian bonds, to 1.25% in the Portuguese bond and to 0.50% in the Irish bond. Greece: capital controls are likely. The negative macro impact should force Tsipras to go through with the reforms. In exchange for this, Greece will receive liquidity and some 18 easing of the official bailout.
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Fixed Income Markets FIXED INCOME - EMERGING MARKETS (GOVIES): “SELECTIVE BUY” CPI (y/y) Andbank's Estimate
10 Year Yield Real
2.54%
0.39%
0.39%
2.15%
Taiwan
1.54%
-0.80%
-0.80%
2.34%
Thailand
2.84%
-1.04%
-1.04%
3.88%
Malaysia
3.87%
1.82%
1.82%
2.05%
Singapore
2.35%
0.03%
0.03%
2.32%
Indonesia
8.12%
3.19%
5.00%
3.12%
Philippines
4.35%
2.17%
2.17%
2.18%
China
3.46%
1.51%
1.51%
1.95%
India
7.99%
4.87%
4.87%
3.13%
Turkey Russia
8.88% 10.07%
7.94% 16.41%
6.00% 13.00%
2.88% -2.93%
Brazil Mexico Colombia Peru
12.35% 5.91% 6.88% 6.07%
8.17% 3.06% 4.64% 3.02%
7.00% 3.06% 4.64% 3.02%
5.35% 2.84% 2.24% 3.05%
EM ASIA
S.Korea
EME
10 Year CPI (y/y) Yield Last Govies reading
LATAM
Our rule of thumb for EM bonds has been “buy” when (1) the US Treasuries are cheap or at fair value and (2) real yields in EM bonds are 175bp above the real yield in UST. Is the UST cheap or at fair value? Historically, a good entry point in the 10Y UST has been when real yields are at or above 1.75%. However, given the “new normal” (ZIRPs globally), a good entry point in the US 10yT could be when Real Yield is at 0.75% (today’s real yield is 2.19%, thus Treasuries are cheap). Do Real Yields in EM bonds provide sufficient spread? Given the “new normal”, a good entry point in EM bonds could be when Real EM yields are 75bp above the real yield in the UST. Since the UST real yield is currently 2.19% we should buy EM bonds that have a Real yield at 2.94%. (See the table).
Cheap valuations
Expensive Valuations
FIXED INCOME – CORPORATE BONDS: USD CORPs – IG: “HOLD”, HY: “HOLD” Spreads stable at 85bp (ML 1-10 index). Financials -2bp to 77bp. Industrials at 90bp. Utilities +1, to 86bp. IG: HOLD. Banks have reduced their bond inventories. Default rates in IG at 1.7% (below the 3.8% historical average). Preferred: Materials, Media, Insurance. HY: HOLD. Expected defaults 10% within the category. Buy Retail as well. 3.0
USD CORPORATE BOND SPREAD (ML 1-10 YR INDEX)
2.5 2.0 1.5 1.0 0.5 0.0
12
13 Co rpora te s (R ig ht) Financia ls (Le ft)
Andbank, Merril Lynch
14
2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4
EUR CORPs: IG: “HOLD”, HY: “BUY” Spreads -3bp (to 91bp). Financials -2bp to 99bp. Industrials stable at 83bp. Utilities +6bp to 110bp. IG: HOLD. Low issuance in April (26bn vs 36bn in March). YTD at 69bn. HY: BUY. More resilient due to its shorter duration. Macro outlook favourable. YTD issuance at 39bn (+23% y/y). 4.0
EUR CORPORATE BOND SPREAD (ML 1-10 YR INDEX)
3.5
2.5
3.0 2.5
2.0
2.0
1.5
1.5 1.0
1.0 0.5
12
13
14
0.5
Co rpo ra te s (Rig ht) (R ight) Industria ls (Le ft) Financia ls (Le ft) Utilities (Le ft)
Ind ustria ls (Le ft) Utilities (Le ft) ©FactSet Research Sys tems
3.0
Andbank, Merril Lynch
©FactSet Research Sys tems
19
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Commodities • METALS & MINERALS: “SELL” Still a negative environment: The new structural pace for heavy industry in China is now lower than we anticipated (7% vs. 10%), and is now consistent with a -10% decline in pace in commodity prices. The Chinese regulators also cracked down on the use of copper as collateral and on the streamlining of SOE’s which will also weigh prices down. The pace of the decline in commodities was intense during the 2H2014 (even more than suggested by our approach - see the 1st chart). This could explain the recent rebounds. Heavy investment in the last decade has caused overcapacity to reach unprecedented levels, and new mining projects are starting to be ramped up to full capacity: Rio Tinto’s Oyu Tolgoi (450k tonnes/year), Chinalco’s Toromocho (230k tonnes), Chinese-controlled Las Bambas (400k tonnes in 2016). The Chilean company Escondida plans to expand production by 300k tonnes. In the period 2006-2012, supply grew at 1.8% y/y whilst demand grew at 3% y/y, but the problems that kept supply subdued have now been dealt with and additional mineral capacity is expected to be 2.7mn tonnes (doubling current capacity). Medium -Term view: The prospects for a new bull market in commodities are dim.
50 40 30 20 10 0 -10 -20 -30 -40 -50
CHINA HEAVY INDUSTRIAL BOOM & COMMODITY PRICES
25 20 15 10 5
'05
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0
(% 1YR , INDEX) CRB Spot Index, Price growth (Left) (% 1YR) Industrial Production, China (Right) Andbank, CRB, Chinese National Bureau of Statistics
©FactSet Research Systems
• ENERGY(OIL): “SELL” Andbank’s Target range ($30-50). Target Price of US$40. (1) OPEC countries set to maintain current production levels at June meeting. The Saudi king's message on oil in talks with President Obama was one of continuity in the Saudi policy. (2) Global (especially US) oil inventories are at record highs. Less refining? Use of recent lows in oil prices to stock up and build inventories? (3) The shale industry has prompted global production to continue to reach new highs, raising the question of where the excess will go once the ability to store oil is filled up. (4) The nuclear deal between Western nations and Iran will lift Iran's sanctions (and boost its oil exports), prompting high supplies back to the market (raising exports by up to 1 million bpd). Iran pumped a total of around 2.8 million bpd in February. (5) Current political winds in China favour a consolidation of State Owned Enterprises (which means the likelihood of SOEs expanding their activity through new energy deals is low). (6) Chinese energy imports are at record highs (meaning that the prices paid for oil will continue to be monitored closely, particularly given that the anti-corruption campaign is set to continue). (7) Russia will continue to be isolated internationally, enabling Xi Jinping to capitalize on this and keep China’s status as a “price-setter” (rather than a “price-maker”). (8) Illicit oil trade jumps. Libya needs an international maritime force to help stop illicit trading in oil. In addition, Lybia reopened the Hariga oil port, ending the strike by the guards. Fundamentally: No changes for now in our outlook, namely that we are in a Structural bear oil market. USD50 in the WTI could represent the upper band of the range for the coming quarters or years. Nevertheless, while military conflicts in the Middle East persist (Iraq, Syria, Yemen), oil prices will remain supported. 20
ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Commodities • GOLD: “SELL” (Target US$ 900/oz) Negative drivers: 1. Gold in real terms. Gold at constant prices of 2009 is now at $1.113 (+$7 in the month and above its LT average of $700). Given our global deflator (base year 2009) at 1.08, for the price of gold in real terms to stay near its historical average, the nominal price of gold must remain near US$756. 2. Gold in terms of Oil (Gold / Oil): The ratio has fallen to 19.85 (from 21.2 previously), and remains above its LT average of 13.87. Given a target price for oil at $40, the nominal price of gold must approach US$554 for this ratio to be near its LT average level. 3. Gold in terms of Equity (Gold / S&P): The ratio has moved to 0.57 (from 0.56 previously), and is near its LT average of 0.59). Given a target price for the S&P at $2.138, the nominal price of gold must approach US$1.261 for this ratio to be near its LT average level. 4. Gold in terms of Equity (Dow Jones / Gold): This ratio (inverse) has moved to 15.1 (from 15.0 previously), still below its LT average of 20.28. Given our target price for the DJI ($18.500), the price of gold must approach US$912 for this ratio to be near its LT average. 5. Positioning in Gold points to further falls: CEI 100oz Active Future non comm. contracts: longs 179k from prior 184k. Shorts 101k from 86k => Net of +77k (from +98k). (Speculators are still long). 6. Central Bank Activity: With the exception of India, Russia and now Japan, the rest of the central banks are continuing to sell part of their holdings in Gold. 7. Financial liberalization in China. Higher “quotas” each month in the QFII are widening the investment alternatives for Chinese investors (historically focused on gold). Positive drivers: 1. The Money Stimulus is continuing (now from the ECB and BOJ). 2. The Ban on India’s imports of gold has been lifted. Many retailers have been stockpiling, fearing that the ban on gold imports would be re-applied. 3. Amount of Gold in the world: The total value of gold in the world is circa US$6.9tn, a fairly small percentage (3.2%) of the total size of the financial cash markets (212trn). The daily volume traded in the LBMA and other gold marketplaces is around US$173bn (2.5% of the world’s gold, and just 0.08% of the total in the financial markets).
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GOLD STOCK - CENTRAL BANK RESERVES (%Y/Y, MA6m)
100
80
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40
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0
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'12 India Thailand
'13 Sing Philipp
Andbank, National Reserve Banks
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'14 Ch ile Ch ina
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©FactSet Res earch Sys tems
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Currencies • EUR/USD: MT Target (1.00) The USD 3-yr Z-score declined to 0.7 on 16th May, making the positioning of the USD the least stretched it has been since June 2014. USD longs have been on a declining trend since January, and this trend accelerated after the March FOMC (coinciding with the deterioration in the Fed’s rate hike expectations). The current Z-score is far below the extremely stretched +2.3 seen in late 2014, and is just 28% of its peak. Accordingly, the USD now appears to be relatively cheap against a range of currencies (CHF, EUR and GBP). At the same time, speculators have continued to scale back their EUR shorts. “EUR short positioning ticked down last week (-1.3 from -1.7 last month and -2.0 6 weeks ago). Despite the net short position, and according to JPM research, the EUR is moderately overvalued vs a string of currencies (USD, JPY and NZD). Net shorts at -1.3 means that as short contracts are scaled back, this could prompt decent pull backs in the EUR, but this should prove to be short-lived. Interpreting 3-yr Z-scores in JPM’s report: the 3-yr Z-score is a summary statistic telling us how far (measured in standard deviations) positioning is away from “normal” (the 3-yr mean). o A Z-score in the -1.0 to +1.0 range implies that positioning is not a barrier to underlying price trends. o A Z-score in the 1.0 to 1.5 range suggests increasingly stretched positioning. o A Z-score absolute value of 1.5 to 2.0 implies that the elastic band has become extremely stretched, and may be on the verge of snapping back. o At a Z-score of 2.0 “everyone” has the position on, creating a dauntingly high hurdle to continued price momentum (at that point it takes an exceptional policy event or data release to surprise the market so that the trend is maintained).
• JPY/USD: MT Target (130) • JPY/EUR: MT Target (130) Specs have thrown in the towel on Abenomics. Specs have closed all the shorts they put on since Abe became PM at end-2012. The Z-score is +0.5 (vs. -1.1 in December).
• GBP/USD: MT Target (0.68) • GBP/EUR: MT Target (0.68) • ASIAN CURRENCY BASKET (Vs. USD): >5% POTENTIAL APPRECIATION According to our “Asian Currency Diffusion Index”, these currencies are still cheap compared to the USD. Emerging Asia looks resilient in terms of its fundamentals. Public and private balance sheets are in decent shape. Macro risks have profoundly shifted as a result of mercantilist policies (less external debt and better CA balances) since the late 1990s. A recovery in sync means that Asia is ready to start a new phase of growth linked to a US recovery. Preferred: CNY, IDR, PHP, MYR, INR.
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
Principal Contributors
Alex Fusté. – Chief Global Economist – Global & Asia: Macro, Rates & Fx . +376 881 248 Giuseppe Mazzeo. – CIO Andbank US – U.S Rates & Equity. +1 786 471 2426 Eduardo Anton. – Portf. Manager US – Credit & Quasi governments. +1 305 702 0601 J.A Cerdan. – Equity strategist Europe – European Equity. +376 874 363 Antoni Melero. – Fund Manager Europe – European Equity. +376 874 366 Renzo Nuzzachi, CFA. – Product Manager LatAm – Rates & Fx. +5982-626-2333 Jonathan Zuloaga. – Analyst, Mexico – Macro, bonds & Fx. +52 55 53772810 Albert Garrido. – Portfolio Manager Luxembourg – Volatility. +352 26 19 39 25 Luiz Secco. – Product Analyst Brazil – Equity. + 55 11 3095 7042 Gabriel Lopes. – Product Analyst Brazil - Products +55 11 3095 7075 Andrés Davila. – Head of A. Management Panama – Venezuela. +507 2975800 Mª Angeles Fernández. – Product Manager, Europe – Macro & Rates. +34 639 30 43 61 David Tomas. – Wealth Management, Spain – Spanish Equity. +34 647 44 10 07
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ECONOMY & FINANCIAL MARKETS CORPORATE REVIEW JUNE -15
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